For your e-commerce or physical store, there are four main options for processing your customers’ payments and managing your transaction data. To help you choose the best merchant services for your business, we’ve created this overview of the four main types of merchant accounts available for credit card processing, along with the pros and cons of each.
1. Traditional Merchant Account
Since computation and before the internet, traditional merchant accounts have been the norm in brick-and-mortar stores across the world. Known as a traditional point-of-sale (POS), on-premise, or legacy system, a traditional retail merchant account provides a way to digitalise payment processing operations on-site via a system of computers linked by wires.
Typically, business owners purchase every cash register and monitor separately and manually install the merchant software. These units process cash and credit card payments and send the data to a centralised drive that is only accessible offline (think hard drives, USBs, and floppy disks). Once a year, the business owner manually updates the entire system to synchronise the latest improvements.
Advantages of a Traditional Account
- There is no easier and more efficient way to manage payment transactions for a brick-and-mortar store or network of stores.
- A traditional account is ideal for businesses already functioning at their maximum capacity.
- A traditional on-premise merchant account is less vulnerable to online hacking attempts.
- Business owners may enjoy the control a traditional account gives them over sales reports and changes to the system.
- It’s easy to track data for each individual credit card terminal.
Disadvantages of a Traditional Account
- The business owner has to be physically present to access data or make a change.
- The initial setup costs are high.
- There is no cloud-based backup if the system crashes.
- Reinstallation in the case of a crash can cause significant delays and lost sales.
- The options for additional features are limited.
- There is limited e-commerce potential unless you opt for a hybrid system.
2. E-Commerce Merchant Account
Today, an online merchant account — sometimes called a mobile POS, internet merchant provider, or Software as a Service POS (SaaSPOS) — is the most common type of merchant account used for e-commerce. Mobile POS systems are also used by some innovative brick-and-mortar stores like Apple.
E-commerce Merchant Account vs. Traditional Merchant Account
E-commerce merchant accounts are similar to traditional merchant accounts in that they connect your business, card networks, and the bank, except that all of the transactions and data are processed and stored online rather than on a physical, wired network.
Because the data is stored in the cloud, business owners can access data in real-time from anywhere in the world. It’s virtually impossible to lose your data because it’s stored online and backed up automatically by the system.
Rather than requiring manual installation, updates and fixes are installed as soon as they become available — ensuring you always have the latest version and circumventing the need for manual intervention.
Advantages of an E-commerce Merchant Account
- Real-time, anywhere access to transaction data and sales reports
- Browse sales trends related to product, country, card type, and a range of other important metrics
- Sales can usually continue offline and are synchronised when connectivity is restored
- Updates automatically
- Easily scalable as your business grows
- Handles multiple currencies and countries
- Data is safely stored in the cloud
- No bulky hardware
- Smaller initial investment
- Set up recurring billing with ease
- Easy to integrate with card readers and receipt printers
- Easy to process credit and debit card payments as well as gift cards
- Wireless functionality improves ease of use
- Easy to add features like loyalty programs, subscriptions, online ordering, and email marketing that’s tailored to your customers’ purchase history
Disadvantages of an E-commerce Merchant Account
- Greater vulnerability to hackers (you can minimise your risk by going with a PCI-compliant payment processor that uses SHA-2 encryption and fraud-scrubbing tools)
- Requires an internet connection to synchronise data on desktop and mobile devices
- The cost may reach that of a traditional POS account as your business grows
3. Merchant Aggregator
The types of merchant accounts we have discussed so far are typically used by established businesses. The third kind of merchant provider — a merchant aggregator — is designed for other types of merchants that may be more informal, just starting out, or unable to open a merchant account with a bank.
How Merchant Aggregators Work
Rather than requiring the merchant to open an account, a merchant aggregator uses its own merchant identification number (MID) and accepts users as “sub-merchants” who all share the MID’s merchant account. Examples of merchant aggregators are PayPal, Google Pay, and Apple Pay.
When a customer makes a purchase through a sub-merchant’s website, the merchant aggregator charges the amount to the customer’s credit card, stored account value, or bank balance (depending on the customer’s selection) and later transfers the funds via a secure, encrypted gateway to the sub-merchant minus a processing fee.
Opening a merchant aggregate account is typically quick and easy, and no ongoing subscription fees are required. The business owner can receive payments from anywhere in the world, making this a popular option for selling digital products online.
Advantages of a Merchant Aggregator Account
- Fast and easy account setup
- No up-front or subscription costs
- No requirement to open an individual merchant account
- Accepts payments from multiple countries
- Data and transactions are stored in the cloud
- The aggregator takes care of security and encryption
- Customers’ credit card details can be saved for subsequent purchases
- Perfect for charities, micro-businesses, and hobbyists
Disadvantages of a Merchant Aggregator Account
- Payments could be withheld for up to 30 days before the aggregator transfers the funds to you.
- Fewer additional services such as loyalty rewards, subscriptions, and personalised email marketing are possible.
- It’s harder for networks to monitor your credit and debit card transactions and assess your merchant risk.
- Your account may be frozen or terminated without warning if suspicious transactions are detected.
4. High-Risk Merchant Account
In many cases, the types of merchant accounts available to you are limited by certain “risk” factors that could affect your payments. Payment processors, card networks, and acquiring banks want to be sure that your business won’t cause them a loss, so they may decide that it’s safer not to work with you unless you take out a high-risk merchant account.
These types of accounts are easy to obtain but come with several additional terms and conditions. For example, a high-risk merchant account might:
- Charge higher monthly rates and transaction fees than a regular account
- Charge severe fees for early termination
- Keep a portion of your funds in reserve (up-front, rolling, or fixed/capped)
- Some shady players offer guaranteed accounts for excessive sums of money and conditions that are impossible to meet
Do I Need a High-Risk Merchant Account?
Whether you need a normal (or “low-risk”) or high-risk merchant account depends on several factors. In general, card networks are most interested in the chance that your business could have a high number or percentage of chargebacks. Chargebacks cost everyone involved a great deal of money and can be indicative of other deeper problems in your business.
The following factors can limit the types of merchant accounts you’ll have access to:
- Average monthly sales volume over $20,000
- Average credit card transaction over $500
- Multiple currencies accepted
- Based in or trades with a “high-risk” country (any country outside of the EU, USA, Canada, Australia, and Japan)
- Offers a subscription program
- Product or service offerings are considered high-risk (software, tickets, digital, controlled substances, gambling, adult content)
- Sales tactics including infomercials and lead-based advertising
- History of exceeding chargeback thresholds and/or placed on the MATCH list
While high-risk types of merchant accounts might seem like something you’d want to avoid, the higher fees and stricter terms might be worth the investment if your revenue is high. To ensure the best result with these retail merchant accounts, find a reputable high-risk payment processor and have your lawyer carefully review the details before you sign on the dotted line.
Choosing the Best Type of Merchant Account for Your Business
To decide which type of merchant account is right for you, consider the payment processing needs of your organization.
- If you are a small, brick-and-mortar business that mostly deals in cash, a traditional POS setup could be the most economical option.
- If you’re just getting your business off the ground and can’t afford a dedicated merchant account just yet, a merchant aggregator could make it much easier to get started.
- In most other cases, a mobile POS merchant provider like Unicorn Payment will give you the greatest flexibility and scale with the most economical price tag for the services offered.
Whichever kind of merchant account you choose for credit and debit cards, be sure to select a trusted merchant services provider that caters to your business type — and always read the fine print before signing up. You can also change your account type later, so keep researching the options as your business grows.